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Article 1, Section 8, Clause 4 (Bankruptcy)

Document 5

Harrison v. Sterry

5 Cranch 289 1809

March 15th, 1809. Marshall, Ch. J., delivered the opinion of the court, as follows, viz:--The object of this suit is to obtain the direction of the court, for the distribution of certain funds in South Carolina, which were the property of a company trading in England, under the firm of Bird, Savage & Bird, and in America, under the firm of Robert Bird & Co. The United States claim a preference to all other creditors, and their claim will be first considered.

I. Two points have been suggested, as taking this case out of the operation of the preceding decisions of the court respecting the priority to which the United States are entitled. 1. That the contract was made with foreigners, in a foreign country. 2. That the United States have waived their privilege, by proving their debt under the commission of bankruptcy.

1. The words of the act, which entitle the United States to a preference, do not restrain that privilege to contracts made within the United States, or with American citizens. To authorize this court to impose that limitation on them, there must be some principle in the nature of the case which requires it. The court can discern no such principle. The law of the place where a contract is made is, generally speaking, the law of the contract; i. e., it is the law by which the contract is expounded. But the right of priority forms no part of the contract itself. It is extrinsic, and is rather a personal privilege, dependent on the law of the place where the property lies, and where the court sits which is to decide the cause. In the familiar case of the administration of the estate of a deceased person, the assets are always distributed according to the dignity of the debt, as regulated by the law of the country where the representative of the deceased acts, and from which he derives his powers; not by the law of the country where the contract was made. In this country, and in its courts, in a contest respecting property lying in this country, the United States are not deprived of that priority which the laws give them, by the circumstance that the contract was made in a foreign country, with a person resident abroad.

2. Nor is this priority waived, by proving the debt before the commissioners of the bankrupt. The 62d section of the bankrupt act expressly declares, that "nothing contained in that law shall, in any manner, affect the right of preference to prior satisfaction of debts due to the United States, as secured by any law heretofore passed." There is nothing in the act which restrains the United States from proving their debt under the commission, and the 62d section controls, so far as respects the United States, the operation of those clauses in the law which direct the assignees to distribute the funds of the bankrupt equally among all those creditors who prove their debts under the commission. Omit this section, and the argument of the counsel for the general creditors would be perfectly correct. The coming in as a creditor, under the commission, might then be considered as electing to be classed with other creditors. But the operation of this saving clause is not confined to cases in which the United States decline to prove their debt under the commission. It is universal. It introduces, then, an exception from the general rule laid down in the 29th and 30th sections of the act, and leaves to the United States that right, to full satisfaction of their debts, to the exclusion of other creditors, to which they would be entitled, had they not proved their debt, under the commission.

The priority of the United States is to be maintained in this case, unless some of the creditors can show a title to the property anterior to the time when this priority attaches. The assignment made to Richard Harrison is, it is contended, such a title. To this assignment, several objections have been made.

1st. It is said, that Robert Bird was not authorized to make it, because it is not a transaction within the usual course of trade. But this court is of opinion, that it is such a transaction. The whole commercial business of the company in the United States was necessarily committed to Robert Bird, the only partner residing in this country. He had the command of their funds in America, and could collect or transfer the debts due to them. The assignment under consideration is an act of this character, and is within the power usually exercised by a managing partner. In such a transaction, he had a right to sign the name of both firms, and his act is the act of all the partners.

2d. It is the assignment of a chose in action; and is, therefore, to be considered rather as a contract than an actual transfer, and could be of no validity against the several claimants in this case. The authorities cited at bar, especially those from 1 Atkins, and Williams's Law Cases, are conclusive on this point, to prove that equity will support an equitable assignment.

3d. But a third exception has been taken to this instrument, which the court deems a substantial one. It is made under circumstances which expose it to the charge of being a fraud on the bankrupt laws. Considered as the act of Bird, Savage & Bird, it is dated but a few days before their bankruptcy; and considered as the act of Robert Bird & Co., it is but a short time before they stopped payment, and is made at a time when there is much reason to believe, from the face of the deed, as well as from extrinsic circumstances, that such an event was in contemplation.

Money actually advanced upon the credit of this assignment, subsequent to its date, might perhaps be secured by it; but there is no evidence, that any money was actually advanced upon it, and the face of the instrument itself would not encourage such an opinion. It might be caught at, by those who were already creditors, but holds forth no inducements to become creditors. It was impossible for any person viewing it, to judge of the sufficiency of the fund, or of the pre-existing liens on it. This assignment, therefore, under all its circumstances, many of which are not here recited, is no bar to the claim of the United States, or of the attaching-creditors.

This being the case, there exists no obstacle to the priority claimed by the United States, and their debt is to be first satisfied out of the fund to be distributed by the court.

II. The attaching-creditors are next in order. By the bankrupt law of the United States, their priority, as to the funds of the bankrupt, is lost. They can only claim a dividend with other creditors. So far, then, as the effects attached are the effects of the bankrupt, their lien is removed by the bankruptcy. Robert Bird alone has become a bankrupt under the laws of the United States. Consequently, only his private property and his interest in the funds of the company pass to his assignees. This interest is subject to the claim of his copartners, and if, upon a settlement of accounts, Robert Bird should appear to be the creditor or the debtor of the company, his interest would be proportionably enlarged or diminished. But he is not alleged to be either a creditor or a debtor; and of consequence, the court consider his interest as being one undivided third of the fund. This third goes to his assignees.

As the bankrupt law of a foreign country is incapable of operating a legal transfer of property in the United States, the remaining two-thirds of the fund are liable to the attaching-creditors, according to the legal preference obtained by their attachments.

The court thinks it equitable, to order that those creditors who claim under the deed of the 31st of January 1803, and who have not proved their debts under the commission of bankruptcy, should be now admitted to the same dividend out of the estate of the bankrupt as they would have received, if, instead of relying on the deed, they had proved their debts. The assignees, therefore, take this fund subject to that equitable claim, and in making the dividend, those creditors are to receive, in the first instance, so much as will place them on an equal footing with the creditors who have proved their debts under the commission.

With respect to any surplus which may remain of the two-thirds, after satisfying the United States, and the attaching-creditors, it ought to be divided equally among all the creditors, so as to place them on an equal footing with each other. The dividends paid by the British assignees, and those made by the American assignees, being taken into consideration, this residuum is to be so divided between them as to produce equality between the respective creditors.

The Founders' Constitution
Volume 2, Article 1, Section 8, Clause 4 (Bankruptcy), Document 5
The University of Chicago Press

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